This Week's Headlines:
Bank of England Digital Currency To Upend Payments Market?
While the Bank of England (BoE) has been quite transparent about its interest in digital currencies since 2015, word finally broke out via British newspaper The Telegraph at year-end that the BoE plans to issue a "Bitcoin-Style" digital currency. Contrary to the reports, the BoE press office quickly confirmed to Diar that it is unlikely that a digital currency will happen anytime soon. However, no final decision seems to have as of yet been made – for or against on the matter. What is interesting though is the potential that anyone, not just banks, could hold the digital currency directly with the central bank.
The Bank of England have been at the forefront of research on a potential Central Bank Digital Currency (CBDC). In 2015, the BoE setup a dedicated unit to research digital currencies and has since released various macro-economic papers on the long-term effects of a CBDC.
A story by The Telegraph went viral on 30 December 2017 stating that the BoE plans to issue a digital currency of its own. The report was later quickly refuted by other sources. The BoE directed Diar to a speech by Chief Cashier Victoria Cleland where she said "there are now a myriad of different ways to pay, with digital currencies emerging, mobile payments developing and innovations such as contactless cards gaining real traction. There is also growing interest in time banking and non-monetary based exchanges. And we have even considered whether there might be a Bank of England issued digital currency, but do not envisage this in the foreseeable future."
But the BoE haven't been sitting on the sidelines. Alongside Ripple Labs, the BoE completed a trial program with the central banks own Real Time Gross Settlement (RGTS) system in summer of last year testing cross-border payments (Diar, 20 November 2017).
And the trial was successful. But what has most certainly caught the eye of the BoE more than the potential of quick cross-border payments is the distributed ledger technology (DLT). Any possible CBDC would require DLT to ensure 100% uptime operations 24/7.
One of the key design questions of a CBDC is whether or not individuals, much likes banks, would be able to hold their funds directly with the central bank - a liability on the books of the BoE. Currently, only financial institutions are allowed to hold accounts with any central bank. The only risk-free asset that an individual could claim against a central bank as it stands is in fact cash.
The dedicated BoE website for digital currencies states that "If a central bank were to issue a digital currency everyone, including businesses, households and financial institutions other than banks, could store value and make payments in electronic central bank money in addition to being able to pay with cash."
Should the BoE adopt this approach when and if they issue a CBDC, the effects could potentially reverberate across the financial sector. The first victims could potentially be Visa and MasterCard as consumers and merchants would be able to settle immediately amongst each other directly and instantly on the central banks balance sheet.
The payment mechanism is of most important concern for central banks. A delay in issuing a CBDC in an era were digital payments are becoming more and more the norm may result in a dependancy on banks and payment processors to run the retail economy - a problem that Sweden is currently facing and wishes to address with their own CBDC, the proposed eKrona.
Ripple Labs Book Value Reaches Record on xRapid Adoption Hopes
Ripple Labs’ native cryptocurrency, XRP, has recently overtaken Ethereum as the second highest in terms of market capitalization. In just the past month, its price surged by more than 1400% and the market cap shortly reached $148Bn. Even in the erratic cryptocurrency market, XRP’s rise was contentious. The most probable explanation for its rise is that the investors are confident that Ripple’s XRP will eventually be used as an underlying asset within the banking system. Without considering the circulating supply and consequently XRP’s market cap, another psychological factor could be that XRP is seemingly cheap at less than $4 when compared to Bitcoin and Ethereum.
XRP, however, is much different than other cryptocurrencies. Instead of having a decentralized distribution process, it has been created by a private company, Ripple Labs. Conventional decentralized cryptocurrencies are created by a continuous process of mining where the new coins are distributed to the miners as an incentive for providing their hashpower. Ripple Labs created a finite supply of 100Bn XRP during the initial launch of its distributed ledger network in 2012. Ripple protocol has been entirely open-source since 2013. At the time of writing, roughly 38.7Bn XRP were in circulation while more than 61Bn coins ($161Bn at time of writing) remains under the control of Ripple Labs.
Last year, Ripple Labs announced that it will place 55Bn XRP into a cryptographically-secured escrow account by the end of 2017 and that it will release 1Bn XRP a month for the following 55 months (at least four and a half years). Each month, Ripple Labs can sell upto 1Bn of XRP to use as “incentives to market makers to offer tighter spreads for payments” or to sell to institutional investors to raise capital for Ripple’s ongoing business expenses. The rest that is not used each month by Ripple Labs is put back into the escrow.
Because XRP is not mined, the validating nodes in the Ripple network are not incentivized at all. Ripple relies on what they have dubbed as the Unique Node List (UNL), which is a list of validator nodes that are seen as trusted by the client. The third-party validating nodes operate voluntarily to get direct access to the network or just to help the network. Ripple Labs operated most of the trusted nodes in the network causing fears of centralization of the validating process. To address this, Ripple Labs announced a roadmap stating that they plan to phase out the nodes they control with attested third-party nodes until no entity operates a majority of trusted nodes.
There is a misunderstanding that Ripple is the same thing as XRP. Ripple’s current product suite that is running on its enterprise network RippleNet includes xCurrent, xVia and xRapid. In fact, Ripple’s main product xCurrent does not utilize XRP at all. In October 2017, Ripple announced that more than 100 financial institutions use Ripple’s products “to provide a global payments experience that delivers instant, certain, low-cost global payments to their customers.”
xRapid is Ripple’s only product that uses XRP. It is used as a bridge currency to convert to and then from, which helps to minimize liquidity costs. xRapid is currently mainly marketed for payments into emerging markets because they often require pre-funded local currency accounts that drives up liquidity costs. The only known company that is using xRapid is Mexico based Cuallix, a credit facility and payment processor, in order to reduce the cost of sending cross-border payments from the U.S. to Mexico. Ripple says that there are more companies that have piloted, or use XRP, but are protected under non-disclosure agreements.
xCurrent is used by the vast majority of clients because it provides them with a nearly instantaneous settlement platform used for cross-border payments that is superior to SWIFT. It is a two way communication protocol instead of just one way that SWIFT supports. In order for xCurrent to work, both banks must opt into the platform, which creates a network effect. SWIFT has in the meantime launched their own blockchain proof of concept. The supporters of Ripple are hoping that the financial institutions that are currently using xCurrent will eventually switch to xRapid to reduce time and costs.
It is apparent that Ripple Labs is one of a handful of sound companies in the Cryptocurrency space with a functioning business model. xRapid, which is Ripple’s only product that involves XRP, is currently only publicly used by one company and there is no clear indication that more financial institutions are going to adopt it in the near future. SBI Holdings, a major investor in the firm, hinted at considering XRP in their annual report although nothing has been announced officially. Using XRP presents regulatory concerns and other risks that are not favorable for financial institutions. The performance of XRP is currently dependant on a sentiment of Ripple Labs as a company, even though the two are not very intertwined at the moment, which is similar to how many of the ICOs function.
If Ripple Labs keeps releasing 1Bn XRP every month as they signaled, this gives them the ability to spend $2.6Bn monthly (at current prices) for incentives and business funding of itself. It is also worth noting for the investors who wish to invest and hold XRP, that Ripple has a reserve requirement of 20 XRP for any new Ripple address that gets activated. At current prices, the reserve requirement comes to approximately $50 but it can be changed in the future by validator consensus to reflect the bull run.
XRP Continues Its Ascent in 2018 (USD)
XRP Trading Volumes Surge Year-End (USD)
Ripple Boasts Big Money Clientele
|Accenture||Nishi-Nippon City Bank|
|Aeon Bank||North Pacific Bank|
|American Express||Orix Bank Corporation|
|Ashikaga Bank||Resona Bank|
|ATB Financial||Royal Bank of Canada (RBC)|
|Australia and New Zealand Banking Group (ANZ)||Royal Bank of Scotland (RBS)|
|Awa Bank||San-in Godo Bank|
|Banco Bilbao Vizcaya Argentaria (BBVA)||SAP|
|Bank of England||SBI Holdings|
|Bank of the Ryukyus||SBI Remit|
|Bank of Yokohama||SBI Sumishin Net Bank|
|BMO Financial Group||Senshu Ikeda Bank|
|Cambridge Global Payments||Seven Bank|
|Canadian Imperial Bank of Commerce (CIBC)||Shanghai Huarui Bank (SHRB)|
|CBW Bank||Shimizu Bank|
|CGI Group||Shinkin Central Bank|
|Chiba Bank||Shinsei Bank|
|Chugoku Bank||Siam Commercial Bank (SCB)|
|Commonwealth Bank of Australia||Sikoku Bank|
|Credit Union||Skandinaviska Enskilda Banken AB (SEB)|
|Cross River Bank||Sony Bank|
|Daiwa Next Bank||Standard Chartered|
|Davis + Henderson (D+H)||Star One|
|DBS Group Holdings||Sumitomo Mitsui Trust Bank|
|eZforex||The 77 Bank|
|Fidor Bank||The Daishi Bank|
|Fukui Bank||The Nomura Trust & Banking Co.|
|Gunma Bank||Tochigi Bank|
|Hachijuni Bank||Toho Bank|
|Hiroshima Bank||Tokyo Star Bank|
|Hokuriku Bank||Tsukuba Bank|
|Iyo Bank||UniCredit Group|
|Juroku Bank||Volante Technologies|
|Keiyo Bank||Western Union|
|Michinoku Bank||Westpac Banking Corp|
|Mitsubishi UFJ Financial Group (MUFG)||Yachiyo Bank|
|Mizuho Financial Group||Yamagata Bank|
|Mizuho Financial Group (MHFG)||Yamaguchi Bank|
|Musashino Bank||Yantra Financial Technologies|
|National Australia Bank (NAB)||Yes Bank|
|National Bank of Abu Dhabi (NBAD)|
Visa Ends Relationship With Sole European Issuer of Cryptocurrency Cards
Visa ended a relationship with WaveCrest, an issuing company that was responsible for providing the vast majority of cryptocurrency backed debit cards. Most of the cryptocurrency cards effectively stopped functioning without any notice. Last November, Diar reported that WaveCrest was monopolizing the space in Europe increasing the likelihood of a potential choke hold on the cryptocurrency debit cards - an event which took place on 6 January (Diar, 6 November 2017).
WaveCrest users were previously affected when all cards for people living outside of the European territory ceased to function in October due to new Visa regulations. At that time, customers were informed in advance.
Visa terminated their relationship with WaveCrest “due to continued non-compliance with [their] operating rules.” It is not certain what these operating rules were or whether they were related to cryptocurrencies. Visa also stated that “other approved card programmes that use fiat funds converted from cryptocurrency” will not be affected.
In an email to CNBC, WaveCrest said that: “as a licensed E-Money Institution, WaveCrest is required to safeguard funds to cover all of its issued electronic money and we can confirm that these funds are safe and available for redemption through other channels.”
Currently, the only cards that continue to function are BitPay and Shift for residents of the United States and CoinJar for residents of Australia. WageCan and Centra Tech have the only cards that are issued worldwide. However, WageCan is charging a whopping $225 issuance fee and a 2.5% ATM withdrawal fee.
Centra Tech, which raised $32 million in an ICO in September, is issuing cards worldwide but only to the ICO contributors that are holding Centra tokens. Centra Tech’s reputation has come up as questionable and are infamous for being endorsed by celebrities such as boxer Floyd Mayweather. A class action lawsuit has been filed against Centra Tech for misleading investors about the nature of its relationship with Visa and Mastercard as well as creating fake team members on their website prior to raising funds.
While notorious merchants such as Steam and Microsoft are stopping to accept Bitcoin amid scaling issues, Bitcoin enthusiasts will find it more challenging to actually spend their coins. The card providers will have to establish new relationship with alternative card issuers. TenX, among others, announced that they will issue their new cards worldwide through Wirecard soon. However, exact dates haven’t been announced yet. US consumers may face a similar fate with only the Metropolitan Commercial Bank issuing crypto debit cards.
Cryptocurrency Debit Cards
|Company||Supported Currencies||Visa Issuer||Issued In||Spot-Rate Conversion||Working Status|
|Bitwala||BTC||WaveCrest||Not being issued now||No||No|
|Coinsbank||BTC, LTC||WaveCrest||Not being issued now||Yes||No|
|CryptoPay||BTC||WaveCrest||Not being issued now||No||No|
|Mobi||BTC||WaveCrest||Not being issued now||Yes||No|
|Shakepay||BTC, DASH, ETH||Wavecrest||Not being issued now||No||No|
|SpectroCoin||BTC, DASH, ETH and other||WaveCrest||Not being issued now||Yes||No|
|TenX||BTC||WaveCrest, Wirecard AG||Worlwide||Yes||Not yet|
|TokenCard||ERC20 Tokens||WaveCrest||Not being issued now||-||No|
|Uquid||90 Cryptocurrencies||WaveCrest||Not being issued now||-||No|
|Wirex||BTC||WaveCrest, one other issuer||Worldwide||No||Not yet|
|Xapo||BTC||WaveCrest||Not being issued now||Yes||No|
|BitPay||BTC||WaveCrest, Metropolitan Commercial Bank||United States||No||Yes|
|Shift||BTC, LTC, ETH, BCH||Metropolitan Commercial Bank||United States||Yes||Yes|
|Monaco||BTC, ETH||Wirecard AG||Singapore||Yes||Not yet|
|WageCan||BTC||WaveCrest, Private Bank||Worldwide||No||Yes|
|Centra Tech||BTC, ETH, DASH, LTC, ZEC, XMR, Centra Token||The Bancorp Bank||Worldwide||Yes||Yes*|
Bitcoin Volatility Trends Upwards For First Time Since 2013
2017 was eventful for Bitcoin and other cryptocurrencies. On January 1 2017, the price of Bitcoin was just under $1,000 and grew all the way to almost $20,000 in mid-December. Bitcoin’s success has been accompanied by the inflow of institutional money as many new crypto asset hedge funds entered the market. Barry Silbert announced that Grayscale’s investment trusts consisted of primarily Bitcoin but also Ethereum and Zcash crossed $2 billion in Assets under Managemetn (AuM) in December 2017. And two of largest derivatives exchanges in Chicago, Cboe and CME, started offering cash-settled Bitcoin futures. The introduction of futures allows for institutional investors, who were averse to invest large amounts of capital on hack-prone unregulated exchanges, to take positions or hedge against price movements. In fact, more than $70Mn was stolen in Bitcoin in 2017. The total amount of bitcoins that were stolen now amounts to roughly 10% of the overall supply (Diar, 18 December).
The price growth of Bitcoin has been driven by the increased awareness of both the institutional and retail investors. Coinbase now has more than 13Mn registered accounts. The influx of new users that are willing to invest in Bitcoin, it seems, is predominantly driven by speculation and fear of missing out - a view Erik Voorhees voiced in an end of year interview with Coindesk. Some investors are hoping that Bitcoin, which is currently unfeasible for smaller purchases, will become widely used in the future as a medium exchange after a sidechain solution such as the Lightning Network will be implemented. Bitcoin’s median transaction fees have been above $15 in December. Bitcoin’s developers, which have the support of most of the community, are not planning to increase the blocksize, which could serve as a temporary solution to ease the pressure. While Bitcoin is currently impractical to use for everyday transactions, more capital is flowing into altcoins such as Ethereum, Ripple and Bitcoin Cash. Bitcoin’s percentage of total market capitalization is nearing the all-time low of 34.5% at time of writing.
For Bitcoin to serve as money, it must function as a store of value, unit of account and medium of exchange. One of the most important prerequisites for all of these functions is volatility. While Bitcoin’s high volatility is exciting for the traders, it is not good for the overall payments ecosystem. In 2015, Bitcoin advocate Andreas Antonopoulos said “Don't be too excited with recent bitcoin short squeeze and rapid price climb. Volatility is bad even when it's going upwards.”
Bitcoin Volatility 2011-2017 (%)
High levels of volatility make Bitcoin impractical for merchants, payment processors but also for risk averse investors. Even though volatility has historically been very high for Bitcoin, it was at least decreasing year-on-year and Bitcoin was thought to mature. This was not the case in 2017 as daily volatility has been trending upwards for the first time since 2013. In fact, volatility levels have only increased in 2013 and 2017 and have decreased in all the remaining years. It remains to be seen what effect will the futures have on Bitcoin’s volatility.
Before 2017, it was hypothesized that an increase in adoption leads to reduced volatility. However, it was assumed that Bitcoin will be adopted for its use cases and features such as decentralization, censorship-resistance, privacy and scarcity. Bitcoin was supposed to bank the unbanked. And that may be the case as the technology improves.
However, mass adoption driven by speculation and not the underlying technology led to an unsustainable increase in transactions, which in turn crippled the network by driving up the fees and confirmation times. Ultimately, Bitcoin is only usable as a volatile store of value and as an instrument for safely sending larger transactions without government’s ability to seize it.
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